Diamond Hill Capital Management is an independent and publicly owned investment adviser based in Columbus, Ohio, with over $8 billion in assets. The firm employs a bottom-up stock picking approach based on a fundamental analysis of a company’s profitability and market position, financial and competitive position, management quality, valuation and growth components of valuation. However, it does not ignore top-down factors, such as industry dynamics, sector economic factors, long-term capital flows and the regulatory environment, excluding macro-economic factors.
Its top buys in the second quarter are: Walgreen Co. (WAG, Financial), Pharmaceutical Product Development Inc. (PPDI, Financial), Tenneco (TEN, Financial) and White Mountains Insurance Group Ltd. (WTM, Financial).
Walgreen Co. (WAG)
Walgreen Co. is a national retail pharmacy chain and considered the leader in innovative drugstore retailing. Walgreen Co. has a market cap of $36.29 billion; its shares were traded at around $39.64 with a P/E ratio of 15.6 and P/S ratio of 0.6. The dividend yield of Walgreen Co. stocks is 1.8%. Walgreen Co. had an annual average earnings growth of 11.7% over the past 10 years. GuruFocus rated Walgreen Co. the business predictability rank of 4.5-star. Diamond Hill Capital bought 801,459 shares of Walgreens stock for about $42.98 per share.
New store growth at Walgreens has slowed in recent years. It opened 937 net new stores in 2008, 561 in 2009, 549 in 2010 and 138 in 2011. It currently owns 7,733 drugstores. The company is also facing difficulty due to an impasse it reached in talks with pharmacy benefits manager Express Scripts. Walgreens has announced it would turn down $5 billion in annual revenue because it believes Express Scripts pay it too little to fill prescriptions, according to the New York Times. The company stands to lose about 90 million prescriptions per year if the two parties do not eke out a deal, which has brought down the stock.
Walgreens recently announced several big changes that could add to revenues. On Thursday it said it plans to offer electric vehicle (EV) charging stations across the country by the end of the year, making it the nation’s largest retail provider for this service. It will also be adding fruits and vegetables to at least 1,000 stores in conjunction with First Lady Michelle Obama’s initiative to make more healthy food available to underserved communities.
The company has a stellar balance sheet. It reached its 10-year peak free cash flow of $2.8 billion in 2010, increased from $2.3 billion in 2009. This represents a jump after 8 years when free cash flow had only topped $1 billion once (2006). It has cash of $2.7 billion and long-term liabilities and debt of about $4.6 billion. Both of these figures also represent 10-year highs. Gross margins have stayed around 27% - 28% over the last decade, and operating margins have remained steady at over 5%. Walgreens has grown revenue every year, without exception, since 2001.
Pharmaceutical Product Development (PPDI)
As a global provider of discovery and development services and products for pharmaceutical, biotechnology and medical device companies, PPD applies innovative technologies, therapeutic expertise and a commitment to quality to help clients maximize the return on their R&D investments.
Pharmaceutical Product Development Inc. has a market cap of $3.49 billion; its shares were traded at around $30.85 with a P/E ratio of 24.4 and P/S ratio of 2.4. The dividend yield of Pharmaceutical Product Development Inc. stocks is 1.9%. Pharmaceutical Product Development Inc. had an annual average earnings growth of 12.2% over the past 10 years.
PPD earned cash flow from operations of $41.9 million in the first quarter 2011. Total cash flow for 2010 was $185 million, on about $1.5 billion in revenue. At March 31, 2011, PPD had $452.6 million in cash and investments, after paying $200 million for share repurchases and $19.0 million on dividends.
The excellent earnings report sent the stock up considerably, but it subsequently fell to an ever lower price. As a result, the company issued a statement saying, “Following recent stock market developments, PPD Inc. today announced that its board of directors has asked management to review PPD's strategic plan and capital structure with a focus on unlocking value for shareholders.” Fred Eshelman, executive chairman of PPD, added, "While the company generally has a policy of not commenting on speculation, we want to assure our customers and employees that the company remains focused on executing its long-term business strategy. We are absolutely dedicated to performing for our customers and committed to executing the important research programs that they have entrusted to us." The statement precipitated a surge in the stock price.
Tenneco (TEN)
Tenneco is one of the world's largest designers, manufacturers and marketers of emission control and ride control products and systems for the automotive original equipment market and the aftermarket. The company does business with many major automotive manufacturers, including General Motors (GM), Ford Motor Co. (F) and Honda.
Tenneco has a market cap of $2.63 billion; its shares were traded at around $43.47 with a P/E ratio of 22.6 and P/S ratio of 0.4. Tenneco had an annual average earnings growth of 0.2% over the past 10 years.
After losing $70 million in 2008, the company generated $126 million in 2009 and $96 million in 2010. Its first-quarter results were particularly impressive: EBIT was up 59% to 94 million and total revenue increased 34% to $1.8 billion, year over year. Tenneco’s cash performance is seasonal – it uses more in the first quarter to prepare for OE platform launches and the aftermark selling season. It raised capital expenditures year over year as well in order to support customer launch programs and expand in fast-growing markets. It also used some of the extra cash for a share repurchase program it approved in May through which it will buy 400,000 shares of common stock over the next 12 months.
Auto manufacturers are face a plethora of new emissions regulations. All impact light vehicles, on- and off-road commercial vehicles, locomotives and two-wheelers globally are required to substantially reduce vehicle tailpipe emissions by 2014. Company such as Tenneco will capitalize on the growing demand.
White Mountains Insurance Group Ltd. (WTM)
Bermuda-domiciled White Mountains Insurance Group Ltd. is a property and casualty insurance and reinsurance holding company. Its wholly-owned insurance businesses include White Mountains Re Group Ltd, Esurance, White Mountains Reinsurance Company of America, White Mountains Re Solutions, Sirius International Insurance Corporation. It tends to invest in troubled insurance companies and increase their book value.
White Mountains Insurance Group Ltd. has a market cap of $3.43 billion; its shares were traded at around $431.32 with a P/E ratio of 30.8 and P/S ratio of 0.9. The dividend yield of White Mountains Insurance Group Ltd. stocks is 0.2%. Diamond Hill Capital bought 18,082 shares at an average price of $381.96 per share in the second quarter 2011.
Revenue for the company has been falling for the last three years, from $3.7 billion in 2008 to $3.2 billion in 2010. Lower realized investment gains contributed most to its 2009 to 2010 decline.
The company repurchased 677,000 of its outstanding shares at an average price of $328 per share in 2010 and plans to make more in the near future.
White Mountains was the owner of Esurance until May 18 when it sold the online insurer to Allstate for $700 million plus the tangible book value at closing of the entities being sold. It is estimated that the transaction will increase White Mountains’ book value by $80 per share. The deal should close in the fall.
Its top buys in the second quarter are: Walgreen Co. (WAG, Financial), Pharmaceutical Product Development Inc. (PPDI, Financial), Tenneco (TEN, Financial) and White Mountains Insurance Group Ltd. (WTM, Financial).
Walgreen Co. (WAG)
Walgreen Co. is a national retail pharmacy chain and considered the leader in innovative drugstore retailing. Walgreen Co. has a market cap of $36.29 billion; its shares were traded at around $39.64 with a P/E ratio of 15.6 and P/S ratio of 0.6. The dividend yield of Walgreen Co. stocks is 1.8%. Walgreen Co. had an annual average earnings growth of 11.7% over the past 10 years. GuruFocus rated Walgreen Co. the business predictability rank of 4.5-star. Diamond Hill Capital bought 801,459 shares of Walgreens stock for about $42.98 per share.
New store growth at Walgreens has slowed in recent years. It opened 937 net new stores in 2008, 561 in 2009, 549 in 2010 and 138 in 2011. It currently owns 7,733 drugstores. The company is also facing difficulty due to an impasse it reached in talks with pharmacy benefits manager Express Scripts. Walgreens has announced it would turn down $5 billion in annual revenue because it believes Express Scripts pay it too little to fill prescriptions, according to the New York Times. The company stands to lose about 90 million prescriptions per year if the two parties do not eke out a deal, which has brought down the stock.
Walgreens recently announced several big changes that could add to revenues. On Thursday it said it plans to offer electric vehicle (EV) charging stations across the country by the end of the year, making it the nation’s largest retail provider for this service. It will also be adding fruits and vegetables to at least 1,000 stores in conjunction with First Lady Michelle Obama’s initiative to make more healthy food available to underserved communities.
The company has a stellar balance sheet. It reached its 10-year peak free cash flow of $2.8 billion in 2010, increased from $2.3 billion in 2009. This represents a jump after 8 years when free cash flow had only topped $1 billion once (2006). It has cash of $2.7 billion and long-term liabilities and debt of about $4.6 billion. Both of these figures also represent 10-year highs. Gross margins have stayed around 27% - 28% over the last decade, and operating margins have remained steady at over 5%. Walgreens has grown revenue every year, without exception, since 2001.
Pharmaceutical Product Development (PPDI)
As a global provider of discovery and development services and products for pharmaceutical, biotechnology and medical device companies, PPD applies innovative technologies, therapeutic expertise and a commitment to quality to help clients maximize the return on their R&D investments.
Pharmaceutical Product Development Inc. has a market cap of $3.49 billion; its shares were traded at around $30.85 with a P/E ratio of 24.4 and P/S ratio of 2.4. The dividend yield of Pharmaceutical Product Development Inc. stocks is 1.9%. Pharmaceutical Product Development Inc. had an annual average earnings growth of 12.2% over the past 10 years.
PPD earned cash flow from operations of $41.9 million in the first quarter 2011. Total cash flow for 2010 was $185 million, on about $1.5 billion in revenue. At March 31, 2011, PPD had $452.6 million in cash and investments, after paying $200 million for share repurchases and $19.0 million on dividends.
The excellent earnings report sent the stock up considerably, but it subsequently fell to an ever lower price. As a result, the company issued a statement saying, “Following recent stock market developments, PPD Inc. today announced that its board of directors has asked management to review PPD's strategic plan and capital structure with a focus on unlocking value for shareholders.” Fred Eshelman, executive chairman of PPD, added, "While the company generally has a policy of not commenting on speculation, we want to assure our customers and employees that the company remains focused on executing its long-term business strategy. We are absolutely dedicated to performing for our customers and committed to executing the important research programs that they have entrusted to us." The statement precipitated a surge in the stock price.
Tenneco (TEN)
Tenneco is one of the world's largest designers, manufacturers and marketers of emission control and ride control products and systems for the automotive original equipment market and the aftermarket. The company does business with many major automotive manufacturers, including General Motors (GM), Ford Motor Co. (F) and Honda.
Tenneco has a market cap of $2.63 billion; its shares were traded at around $43.47 with a P/E ratio of 22.6 and P/S ratio of 0.4. Tenneco had an annual average earnings growth of 0.2% over the past 10 years.
After losing $70 million in 2008, the company generated $126 million in 2009 and $96 million in 2010. Its first-quarter results were particularly impressive: EBIT was up 59% to 94 million and total revenue increased 34% to $1.8 billion, year over year. Tenneco’s cash performance is seasonal – it uses more in the first quarter to prepare for OE platform launches and the aftermark selling season. It raised capital expenditures year over year as well in order to support customer launch programs and expand in fast-growing markets. It also used some of the extra cash for a share repurchase program it approved in May through which it will buy 400,000 shares of common stock over the next 12 months.
Auto manufacturers are face a plethora of new emissions regulations. All impact light vehicles, on- and off-road commercial vehicles, locomotives and two-wheelers globally are required to substantially reduce vehicle tailpipe emissions by 2014. Company such as Tenneco will capitalize on the growing demand.
White Mountains Insurance Group Ltd. (WTM)
Bermuda-domiciled White Mountains Insurance Group Ltd. is a property and casualty insurance and reinsurance holding company. Its wholly-owned insurance businesses include White Mountains Re Group Ltd, Esurance, White Mountains Reinsurance Company of America, White Mountains Re Solutions, Sirius International Insurance Corporation. It tends to invest in troubled insurance companies and increase their book value.
White Mountains Insurance Group Ltd. has a market cap of $3.43 billion; its shares were traded at around $431.32 with a P/E ratio of 30.8 and P/S ratio of 0.9. The dividend yield of White Mountains Insurance Group Ltd. stocks is 0.2%. Diamond Hill Capital bought 18,082 shares at an average price of $381.96 per share in the second quarter 2011.
Revenue for the company has been falling for the last three years, from $3.7 billion in 2008 to $3.2 billion in 2010. Lower realized investment gains contributed most to its 2009 to 2010 decline.
The company repurchased 677,000 of its outstanding shares at an average price of $328 per share in 2010 and plans to make more in the near future.
White Mountains was the owner of Esurance until May 18 when it sold the online insurer to Allstate for $700 million plus the tangible book value at closing of the entities being sold. It is estimated that the transaction will increase White Mountains’ book value by $80 per share. The deal should close in the fall.
